Inflation in August Up Moderate 0.2%; Housing Starts Sag

Consumer prices rose a modest 0.4% while housing starts dipped 3.3% in August, the government said today, signaling that an overheated economy is subsiding along with fears of rapid inflation.

The drought pushed up food costs a steep 0.6% while energy prices--due to gasoline price increases--soared 0.9%, the Labor Department said.

Excluding food and energy, prices rose only 0.2% in August. “That’s the most significant number,” said David Wyss, an economist with Data Resources Inc. in Lexington, Mass.

The improvement reflects a 1.6% plunge in apparel prices as retailers held larger-than-usual end-of-season sales of women’s clothing, Wyss said. Apparel prices have declined 2.6% in three months after jumping 3.8% in the first five months of 1988.

Housing starts sagged in July because of a deep slump in starts for multifamily units. Starts for the first eight months of this year are 9.9% lower than over the same period of 1987, the Commerce Department said.

All figures were adjusted for seasonal variations.

The statistics are “consistent with the notion the economy has slowed from the breakneck pace of the previous four quarters,” said Hugh Johnson, chief of investing at First Albany Corp.

More Stable Expansion

“That’s good news,” said Johnson, because it indicates more stable economic expansion without rapid growth in inflation.

Lawrence Chimerine, chief economist of the WEFA Group forecasting firm in Bala Cynwyd, Pa., agreed with Johnson’s assessment, noting that slower economic growth, reflected in recent reports on consumer spending and export orders, also will help keep prices from taking off.

“Any escalation in inflation will be slow, gradual and limited,” he said.

Johnson, reflecting on the political impact of today’s figures, said they “don’t give (Democrat) Mike Dukakis much ammunition” for the debate on Sunday with Republican presidential candidate George Bush.

“Moderate economic growth and relatively slow inflation; that’s a pretty darn good combination” for Bush, said Johnson.

The jump in the Consumer Price Index followed similar increases of 0.3% in June and 0.4% in July.

For the first eight months of 1988, inflation accelerated at a 4.6% annual rate, slightly higher than 1987’s 4.4% increase.

About 90% of the August increase in food prices was tied to items affected by the drought, such as cereal and bakery products, poultry and eggs and fruits and vegetables, the government said.

Gasoline Prices Up 3%

Transportation costs were up 0.9% in August, largely accountable to a 3% increase in gasoline prices, the largest monthly jump in a year.

Chimerine said gas price increases could be reversed in future months “in response to a drop in crude oil prices.”

Other energy prices fell in August--fuel oil was down 0.9%, natural gas down 1.2% and electricity down 0.2%, the government said.

The price of a new car rose in August by 0.2% and car financing and used-car prices climbed 1.5%.

Housing costs rose 0.3% in August.

Meanwhile, the government also reported that personal income rose a modest 0.2% last month, the least in eight months. Consumer spending rose a brisker 0.5%.

As in June and July, personal income was held back by declines in subsidy payments to farmers. In an apparent indication of the drought’s impact, farm income excluding subsidies fell $3.2 billion in August.